What Would You Do With This Evil Hard Money Lender?
The life of an investor is not always easy – especially when dealing with evil hard money lenders.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
During the declining market of 2007-2009, I purchased a small two-bedroom home with the intent of “flipping” the house after a quick rehab. As prices began to fall, I decided instead to move into this home and live in it while waiting for the home to sell.
The loan I had taken was a two-year loan with a hard money lender that I had done several deals with. We had a good relationship (up to that point) and before moving into the home I confirmed with the lender that he was okay with my wife and I moving in – to wait out the bad market. Obviously I would have loved to refinance the home into a nice, long term mortgage and turn it into a rental. However, because I had recently quit my job and was investing full time – I could not get a mortgage (perhaps you can identify.)
So I moved in as Christmas time approached, thoroughly enjoying my home. With the due date on the loan quickly approaching, the paperwork was drafted for the "extension" on my hard money loan. The hard money lender called to discuss the final issues.
And then I made a mistake : I mentioned another project I was working on.
OMG… What Do I Do Now?
Immediately hell was let loose on me. How dare I go elsewhere for funding? The lender's primary reason for extending the loan, he claimed, was because he thought I was in a tough spot financially. Obviously if I was working on another deal I wasn't in that hard of a spot.
So just like that â with just a few days before the deadline â he backed out of the extension. I had just three days to pay off the loan or be in default.
Now, I know what you are probably thinking: Why not just go to another lender and pay it off?
Ideally -this would have worked fine. However, as the market had dropped – so did my equity. I owed roughly $55,000 and the home was only listed at $75,000.00 at this point (starting at $99,000). I made calls to as many hard money lenders as I could to no avail.
My Options for Paying Off The Loan
To be perfectly honest – my first mental reaction to this stressful situation was: “Fine – I’ll just let him come take the house.”
I honestly believed he wouldn't really foreclose on me because I had never missed a payment to him in several years and the home had so little equity it would have made no financial sense for him to do so. The hard money lender was currently foreclosing on a number of other homes and I knew he wouldn't want to add mine to it.
However â as much as I wanted to call his bluff â I valued my integrity in the industry even more. In a small town like mine I knew word would get around. I didn't want to be the guy who was foreclosed on by the biggest hard money lender around.
Creativity, Desperation, and Real Estate Investing
Robert Kiyosaki once said, “The poor say ‘I can’t afford it.’ The rich say ‘how can I afford it?'”
Say what you want about Kiyosaki and the Rich Dad empire – I absolutely love this mindset. Rather than shutting down your brain and hiding in a hole I forced myself to solve the problem.
I began by taking inventory of what I did have.
I did, however, have a fair amount of open credit card lines that I could access if needed. While the interest rates were astonishingly high – I was able to access $20,000 in credit. Rather than using “Cash Advances” which carry an interest rate hovering near 30% and a hefty 4% cash-advance fee, I instead used the credit cards and paid a close friend using Paypal – which charged under 3% and was seen by the credit card companies as simply a normal purchase (around 8-9%.)
For the final $35,000 – I swallowed my pride and picked up the phone.
Thank you Dad.
I drained my dad of his home equity line of credit and was able to pay off the loan in full on the day the note was due.
I then dropped the price on the home down to my break-even point, switched real estate agents to the most successful guy in town, and moved out – leaving my furniture there to stage the home with.
Lessons Learned From My Failed Flip
Within three days I had an offer that closed a month later. I made no money on this deal but learned a number of valuable lessons that made me a better investor. I’m going to summarize some of these lessons, along with some tips you can use in your investing, below:
- Your Reputation is Everything: As an investor – your reputation matters. No business thrives without good working relationships -and relationships require trust. By being a person who is known as someone who does what they say they’ll do (even when others are not so trusting) you’ll grow your business through integrity and honesty.
- Creativity Can Get You Far: As I discussed earlier – a good real estate investor needs to look at a situation and say “how can I” not “I can’t.” Using credit cards was not an ideal situation – but it worked. One of the best ways to foster creativity is to simply talk with others who have been there. In my opinion – this is one of the most important benefits of the BiggerPockets Forums. A simple post with a question, scenario, or idea will often times receive dozens of responses from seasoned investors.
- Always have a Back-Up Plan: Like most house flippers during the market decline- I didn’t have a backup plan on this flip. I’ve since learned my lesson. I now never flip a house without at least three backup plans in place. Additionally, as Clay Hubur discussed earlier in his article about applying a “stress test” to your deal – I now make sure the deal pencils out even under a worst-case scenario
What would you have done?
Put yourself in my shoes for a moment. What would you have done in this situation?
Share your thoughts in the comments below. I love sharing stories like this – especially the troubles – because it can help new investors learn without needing to experience the same rough patches. If there is one area of “guruism” I hate more than all the rest – it’s the impression given that a seasoned real estate investor never struggles. In reality – real estate investing is tough and filled with challenges at every level. I joined BiggerPockets because I share this vision and believe the best way to lift our industry is to work together to help each other. So please leave me a comment and then head to the forums to answer a few questions over there!
Photo: Daniel Orth